‘Viktor Orbán has nothing to do with this company’ - MET chief Lantos in interview
Portfolio.hu, 11 June 2015 – The success of MET and its rise into the mid-tier of European energy traders can be attributed to an earlier insight of former MOL experts who realized that gas market trends are about to change decisively, Csaba Lantos, chairman of the board at the Switzerland-based holding company of MET told Portfolio in an interview. The businessman also discussed the HAG contract, the acquisition of power plant operator Dunamenti Erőmű and the company's plans for the future, including a potential raising of further capital. Lantos also revealed whether Prime Minister Viktor Orbán actually used to call him to give advice on what to do in the gas business.
How does a former investment banker, who has recently become known for his healthcare investments, turn into the Chairman of the Board at the MET Group?
At the time when the group was jointly owned by MOL and Russian-based Normeston, a license from the competent authority of the European Commission was conditional on appointing a chairman of the board independent of both parties.
As a highly respected businessman, what was it that made you accept this position?
When I was asked to become chairman, the company was in a situation very similar to what we had 25 years ago when we ran the now legendary CA-IB. MET was originally established as a MOL subsidiary in 2007, and some outstandingly competent people at MOL realised that trends are to take a decisive turn in the gas market. Previously the norm was that long-term gas supply contracts were made between two state-run, or state-influenced companies, with the price of gas in most cases linked to changes in oil price levels. These contracts were meant to guarantee both supply security and a return on investments. This situation had changed fundamentally due to three factors, two of these being technological revolutions. One was the start of American shale-gas production, which made the US a potential exporter from a major importer. The second technological shift was the spread of LNG (liquefied natural gas). This turned gas into a globally tradable commodity even though costs of transporting LNG can rise significantly depending on the way of transport, so what we see are actually global sub-markets. As a result of these technological transformations, gas ceased to be an oil-linked commodity where prices are formed based on bilateral ties between state companies. It became more and more of a free market commodity. The third important element was the change of regulation in Europe, aimed to form a single market in the European Union, which brought about profound changes in the energy and gas markets of the region, and as a result, in Hungary too.
Those who recognized these market shifts gained a competitive edge, and MOL made the right decision at the time to give MET more freedom. These operations are mostly about wholesale trading, which to me invoked experiences from quarter of a century earlier at the CA-IB investment bank, when we lived through a similar moment, just in a different business. This opened the way for a faster decision-making mechanism and to develop a system of interests suited for the situation at hand. This is part of the reason why I was asked to take the position of chairman of the board and why I accepted the call. These activities had no room to grow inside MOL, just as CA-IB could not be accommodated by the necessarily more rigid business structure of Creditanstalt, a major bank. The company since has been taken through the eye of the needle by its management, and took its place in the mid-tier of Europe.
Did you have any regrets for taking this position ever since MET came into the spotlight for its activities and for its non-transparency?
I never expected such mean attacks. MET is absolutely transparent. I have seen and I do see how this company was built and how it operates, and it is a purely market-based business story that we could be proud of. My role, having come from a different industry, is to offer useful observations to the company's management, who all had, right from the beginning, some serious incentives to make the company profitable. It is important to note that today this is an international company owned mostly by Hungarians, with about three quarters of its revenues coming from abroad. I believe it is a remarkable success that an energy trader with no corporate background and with no substantial fixed assets could land a €400 million loan deal with five major European banks. This was essentially a vote of confidence for the company's course of business, and also provides a huge leverage compared to the company's own capital of €160 million. The regional role of the company is also clearly shown by the fact that MET is one of the most rapidly developing holdings in the region, active in eight countries in more than a dozen gas markets and trading points.
If our readers could ask questions on the subject of MET, they would likely ask if Prime Minister Viktor Orbán is actually giving you a call from time to time to discuss what to do in the gas business?
"Viktor Orbán has nothing to do with this company. I'm aware of the political rumours, but these are absolutely not true, and I have seen no sign at all in recent years to suspect otherwise."
The Hungarian government never made any gestures to the company, and MET was actually one of the biggest losers on regulatory changes.
So the HAG (Hungary-Austria gas pipeline) contract actually offered no advantage to MET, and the bargain price of the Dunamenti Erőmű power plant was not a result of how the government manipulated the regulatory environment? Let's face it, these suspicions have been hovering over the company in the past months.
That is an absurd presumption, regulatory changes affected MET just like any other market players. Before 2011 the annual 4.4 billion cubic metres capacity of the HAG pipeline was allocated through auctions, which MET, together with other traders, have regularly participated in. The new rules brought changes here: 70% of free capacities were allocated to MVM, the remaining 30% to E.ON. That could hardly be seen as a favourable change. MVM then offered its surplus capacities for sale in a competitive process. To the best of my knowledge our competitors offered a price below costs. MET, on the other hand, made a much better offer, paying billions.
"The management of MVM took the best possible decision both from an economic, and from a taxpayer’s point of view. It was a fair deal, with no manipulations or capacity transfers involved."
When MET bought the Dunamenti Erőmű power plant, it was running at a massive loss, which of course pushed the price down. If we were to receive special treatment in the case of Dunamenti Erőmű, MVM and/or MAVIR would have long ago entered an agreement with the plant, but as of today, this has not happened. On the other hand, by now the value of advanced, efficient balancing capacities, like those offered by Dunamenti Erőmű, have been recognised by the majority of EU member states, where special capacity remuneration mechanisms were implemented to maintain these capacities. Member states are buying capacities, so if shortages are seen in the power grid, that country can, so to speak, immediately turn on these power plants. However, depending on the specific rules in each country, the transmission system operator, or energy traders and suppliers have to pay a fee in order to provide an incentive to the owner of the power plant to keep these capacities available. Hungary, unfortunately, has failed to adopt such a system yet, but we believe that positive experiences in foreign countries will encourage the establishment of this new sub-market for electric power. Of course nobody will finance loss-making activities over the long term, and at some point MET will have to make a decision on what to do next. Anyway, for the time being at least, we are optimistic.
What kind of transformations have Europe's energy business gone through recently? How did these changes affect the conduct of a trading company?
Europe created a single market for energy too and borders across the European Union were eliminated in this regard as well, which also solved the issue of different underlying settlement systems. Power markets in the Czech Republic, Slovakia and Hungary could be connected, both in a physical sense and in their settlement systems. This is partly based on the clearing system operated by KELER, while physical links are provided by MAVIR. This agreement opened the flow of cheap western electricity to us. KELER CCP for instance, today has revenues from the energy market that equal its financial market revenues.
This market transformed so much so that by now it is not only energy itself that is traded. This tendency towards marketization led to trading in flexibilities, or how much capacity can come on line in how much time, and capacities, which could be a bottleneck such as HAG. So what we have are more and more financial products and options that need to be priced. This is a brand new world and this is what MET realised, and did so in time. This is what this story is mostly about.
What kind of role do Russian owners have in the group? Does MET really have access to Russian gas at a discount?
A Russian investor, Ilya Trubnikov, who holds a dual Russian-Canadian citizenship, owns a stake of less than 13%.
"The assumption that the company has access to cheap Russian gas of any kind is false."
What kind of goals have MET set as a group? Where do you see room for expansion or new opportunities for business?
The purchase of Dunamenti Erőmű shows that MET's management sees Hungary to be promising. However, the real opportunities for growth are to be found outside the borders. The agreement our company has just made with Magyar Telekom is also aiming at international expansion. This too shows that a German-based multinational company, in this case Deutsche Telekom, sees potential for growth in the operating model of the company. We also bought power and gas market assets from GdF. This is a Hungarian success story set in Europe. It is something we ought to be proud of.
While foreign-owned utilities tend to leave the country, a Swiss-based trading company that is majority owned by Hungarians is seen entering the market as a buyer. Do the owners of the company have foresight of favourable changes in regulation in Hungary?
We have no idea about where regulation is headed, unfortunately. On the other hand, the company is actually making a bet on new legislation, we are in essence putting our money on the government, that it will form a competitive set of regulations.
And what is the group worth? Will it ever reach €1 billion in valuation? Is a stock exchange listing of the company conceivable?
I believe there is no point in setting a reasonable goal at anything lower than €1 billion. I would not rule out the possibility of a public offering, but this decision is to up to the owners. Currently banks can finance the company at a lower cost, but this may change as time goes on. The big players are all listed on the stock exchange, as the risk taken by banks is rising proportionately above a certain size, and it may be suitable to cut leverage. There are situations when a stock exchange listing, or issuing company bonds is a reasonable choice.
By Zoltán Bán and Gergely Csiki -